Italy Powers Down Energy Subsidies

La riforma Guidi mira a ridurre di circa un miliardo e mezzo l'anno le sovvenzioni concesse a gruppi di interesse e ad abbattere i prezzi per i consumatori

2 Settembre 2014

Wall Street Journal

Carlo Stagnaro

Direttore Ricerche e Studi

Argomenti / Teoria e scienze sociali

Italy has many economic problems, but one of the most significant is also one of the least discussed: high electricity prices. Italians, and especially small – and medium-size companies, pay the third-highest electricity rates in the European Union, behind Denmark and Cyprus, and their power is 35% more expensive than the European Union average. This is a significant drag on growth, which is why Prime Minister Matteo Renzi is finally doing something about it in a long overdue law recently approved by the parliament.

The main reason for such high rates is that Rome traditionally regarded electricity consumers as the equivalent of an ATM, an easily accessible source of the funds they need to achieve the politicians’ redistributive goals and win votes. This started in the era of state monopoly, when employees of state-owned utilities had a right to discounted electricity prices. That “right” was kept in place for former employees even after the privatization of the incumbent and the liberalization of the electricity market were enacted. This handout to a favored group of workers has been subsidized by all consumers until now. Over time, subsidies were added to subsidies that were added to subsidies.

Even since the monopoly was broken up, the government has retained a central role in rate setting, and has used that power generously. Since 1963, railways have enjoyed a discounted energy price. More recently, a number of industrial sectors, particularly energy-intensive industries, also receive preferential tariffs. Network costs are also above a reasonable “efficient level” given the risk profile of the underlying investments. All of this is subsidized by all the ordinary consumers who must pay more for power.

Making matters worse, Italian renewable generators enjoy what are perhaps the most generous subsidies in Europe. Renewable subsidies account for about one-fifth of the cost of energy to end consumers. The average Italian household now pays about €94 ($125) per year to support green energies on top of their energy bill, up from €31 per year in 2010. The growth has been particularly rapid for solar incentives, whose impact has grown to €21 per megawatt-hour in 2013 from €5 per megawatt-hour in 2010. For each solar megawatt-hour, the generator gets subsidies that are five- to seven-times higher than the average value of energy itself.

Rome piles other taxes and levies onto electricity consumers, such as an excise tax, a levy related to the costs of phasing out nuclear power and a fee to support general R&D in the electricity industry. All these levies, which fund various other redistributive schemes, account for about half of Italy’s excess over the EU average. Electricity rates would be “only” 17% above average, rather than the current 35%, if these levies were equal to the EU average.

The problem has grown particularly serious since the recession. The economic crisis drove down energy consumption. Therefore Italian consumers pay more and more both because the base of subsidized groups has grown, and because the number of those paying full rates is shrinking. A new balance must be found between the interests of struggling small companies and subsidized financial investors that make their salary off resources forcibly taken from consumers.

Fortunately, the tide at last seems to be turning. Federica Guidi, Italy’s minister for economic development, has promoted a reform package, which includes a decree converted into law by the parliament last month as well as other measures. Starting by the end of 2014, the reforms will reduce by approximately €1.5 billion per year the amount of subsidies awarded to various interest groups. This represents about 10% of the overall subsidy bill. The goal is to pull down prices for ordinary consumers.

Previous reform efforts have either tried to contain the rate of growth of subsidies, or shielded some powerful groups from the burden of taxes and levies, but these never addressed the underlying tangle of subsidies that have pushed rates inexorably higher. The new measure is different because it deals with the subsidy problem head-on, and for everyone. No special-interest group has been spared. All of the subsidies that have been mentioned above have been reduced or reframed in order to make them less onerous to consumers.

The reform has created a lot of discontent. Vested interests have noisily opposed it. Nor, for all their fuss, is this a perfect reform for consumers. Some argue that cuts should have been even deeper. But no one should make the perfect the enemy of the good. What really matters is that for the first time small and medium firms aren’t paying the bill but rather will see a concrete benefit.

Even in Italy, if you have political will, a vision and courage, results can be delivered, and the “vested rights” of rent seekers may be counterbalanced by the voice of those who bear the “vested duty” of paying the bill. To paraphrase Mr. Renzi’s electoral slogan, at least with regard to energy, the trend is being reversed.

Dal Wall Street Journal, 2 settembre 2014
Twitter: @CarloStagnaro

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